WASHINGTON – According to an announcement by the Consumer Financial Protection Bureau (CFPB), federal anti-discrimination law requires lenders to give applicants specific reasons for denying an application for credit. CFPB says it’s required “even if the creditor is relying on credit models using complex algorithms.”

CFPB published a Consumer Financial Protection Circular to remind borrowers of creditors’ adverse action notice requirements under the Equal Credit Opportunity Act (ECOA).

“Companies are not absolved of their legal responsibilities when they let a black-box model make lending decisions,” says CFPB Director Rohit Chopra. “The law gives every applicant the right to a specific explanation if their application for credit was denied, and that right is not diminished simply because a company uses a complex algorithm that it doesn’t understand.”

Thanks to data harvesting – a broad collection of diverse data culled from browsers, websites, stores and more – lenders often have highly detailed customer information before they ever interact with someone. Many firms today rely on these detailed datasets to power algorithmic decision-making, which is sometimes marketed as artificial intelligence or AI. Data harvesting has a broad range of commercial uses, such as targeted advertising and in making credit decisions.

Some financial companies have long used advanced computations to help make credit decisions, but they still gave borrowers an explanation if their loan was denied.

However, some creditors today may make credit decisions based on complex algorithm outputs, sometimes called “black-box” models. The reasoning behind some of these models’ outputs –  the basis for accepting or denying a loan – may be unknown to the model’s users and sometimes even the model’s developers.

“With such models, adverse action notices that meet ECOA’s requirements may not be possible,” CFPB said in a statement. … To help ensure a creditor does not discriminate, ECOA requires that a creditor provide a notice when it takes an adverse action against an applicant, which must contain the specific and accurate reasons for that adverse action. Creditors cannot lawfully use technologies in their decision-making processes if using them means that they are unable to provide these required explanations.”

CFPB credits whistleblowers for complaining about companies that use tech in a way that violates ECOA and other federal consumer financial protection laws. It encourages anyone who believes their rights have been denied to contact the bureau through the CFPB Whistleblower Program webpage.

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